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November 26, 2015 9:38 am
Market gains must be franked by new ‘pro-investment’ government
A
fter massive gains in Argentine stocks and bonds over the past two years, investors are beginning to wonder just how much longer the rally can continue as a new government takes power.
Storied hedge fund investors from George Soros to Dan Loeb have been piling into Argentine assets, speculating that better times await Latin America’s third-largest economy once its fiery nationalist leader, Cristina Fernández, quits power.
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At last that moment has arrived. Better still, the market’s preferred candidate, the centre-rightMauricio Macri, clinched victory in presidential elections on Sunday. He promises to put an end to more than a decade of protectionism and state intervention, ushering in a new era of pro-investmentpolicies.
“Argentina has an unparalleled opportunity,” says Emily Fletcher, co-manager of BlackRock’s Frontiers Investment Trust, who argues that Mr Macri’s proposed reforms could finally allow Argentina to realise its true economic potential.
“While we wouldn’t be surprised to see some profit-taking in the short term, the long-term outlook for Argentina is brighter than it has been for some time,” she adds, pointing out that the MSCI Argentina Index rose by 45 per cent in October alone.
Indeed, the tiny and volatile Buenos Aires stock exchange — whose market capitalisation is similar to a large US company — has fallen since Mr Macri’s victory, although Argentina’s heavily-traded bonds have registered slight gains.
Prices for the bonds that were issued by Argentina following its 2001 default have nudged upwards this week, with the yield on debt due to be repaid in 2033 falling eight basis points to 6.96 per cent since the start of the week. That comes after prices for the bond have more than doubled in the last two years to 114.5 cents on the dollar, up from just 51.5 cents in mid 2013.
Alejo Costa, head strategist at Puente, an investment bank in Buenos Aires, thinks that bond yields could continue to fall over the next few weeks as investors react positively to initial announcements by Mr Macri.
“But eventually we will need to see concrete results for the rally to continue,” says Mr Costa. “Soon investors are going to have to start to face up to reality,” he added, pointing to serious challenges facing the next administration.
First, Mr Macri will inherit a toxic economic legacy from Ms Fernández that will require immediate action. Faced with an acute shortage of foreign exchange reserves, Mr Macri has promised to remove strict capital controls on his first day in office.
He has also pledged to move swiftly to unify Argentina’s overvalued official exchange rate, which will effectively mean devaluing the currency. That, in turn, could spur the inflation rate, which is already one of the highest in the world thanks to the wholesale monetisation of a widening fiscal deficit.
Nevertheless, Mr Costa argues that the next government’s biggest problems are in fact political. Lacking the majority in congress that is needed to pass legislation, he warns that Mr Macri could run into grave governability issues.
“The economic problems are extremely serious and urgent. But even if you have the skills to solve them, that’s no use without political willingness,” he said, arguing that most of the major reforms planned by Mr Macri require congressional approval.
One of the most important is the resolution of a long-running legal dispute with a group of so-called “holdout” US hedge funds that has blocked Argentina’s access to international capital markets since its 2001 sovereign debt default.
Although credit rating agency Moody’s raised Argentina’s credit outlook to positive on the back of expectations that the new administration would seek to put an end to the saga, uncertainty about the success of this plan prevented an outright credit upgrade.
Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, points to factors beyond Argentina’s control that are also playing against Mr Macri chances of success. He lists the rapid slowdown of China’s economy, the crash in commodity prices, and the imminent start of the US Federal Reserve’s monetary tightening cycle.
“Macri couldn’t be assuming the presidency at a worse time from an emerging market sentiment standpoint,” says Mr Spiro. “This makes the implementation of economic reform in Argentina all the more difficult — but also all the more urgent.”
Such concerns explain why Jan Dehn, head of research at Ashmore, worries that Mr Macri could end up like other well-intentioned reformist presidents in the region unable to overcome tough circumstances. “The risk is clearly that Macri becomes to Argentina what [Vicente] Fox was to Mexico: an ineffective breath of fresh air,” he says.
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